<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER
FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
------------- --------------------------------------- -------------------
<S> <C> <C>
333-47647 American States Water Company 95-4676679
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
000-01121 Southern California Water Company 95-1243678
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
</TABLE>
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
American States Water Company Yes [x] No [ ]
Southern California Water Company Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 14, 2000, the number of Common Shares outstanding, No Par Value
with Stated Value of $2.50, of American States Water Company was 8,958,008 all
of which are listed on the New York Stock Exchange.
As of July 14, 2000, all of the 100 outstanding Common Shares of Southern
California Water Company are owned by American States Water Company.
<PAGE> 2
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Financial Statements 1
Consolidated Balance Sheets of American States Water Company as of
June 30, 2000 and December 31, 1999 2 - 3
Consolidated Statements of Income of American States Water Company for
the Three Months Ended June 30, 2000 and June 30, 1999 4
Consolidated Statements of Income of American States Water Company for
the Six Months Ended June 30, 2000 and June 30, 1999 5
Consolidated Statements of Income of American States Water Company for
the Twelve Months Ended June 30, 2000 and June 30, 1999 6
Consolidated Statements of Cash Flow of American States Water Company for
The Six Months Ended June 30, 2000 and June 30, 1999 7
Consolidated Balance Sheets of Southern California Water Company as of
June 30, 2000 and December 31, 1999 8 - 9
Consolidated Statements of Income of Southern California Water Company for
the Three Months Ended June 30, 2000 and June 30, 1999 10
Consolidated Statements of Income of Southern California Water Company for
the Six Months Ended June 30, 2000 and June 30, 1999 11
Consolidated Statements of Income of Southern California Water Company for
the Twelve Months Ended June 30, 2000 and June 30, 1999 12
Consolidated Statements of Cash Flow of Southern California Water Company for
the Six Months Ended June 30, 2000 and June 30, 1999 13
Notes to Financial Statements 14 - 16
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operation 17 - 32
Item 3: Quantitative and Qualitative Disclosures About Market Risks 32
PART II OTHER INFORMATION
Item 1: Legal Proceedings 32 - 34
Item 2: Changes in Securities 34
Item 3: Defaults Upon Senior Securities 35
Item 4: Submission of Matters to a Vote of Security Holders 35
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Item 5: Other Information 35
Item 6: Exhibits and Reports on Form 8-K 35
</TABLE>
ii
<PAGE> 4
PART I
ITEM 1. FINANCIAL STATEMENTS
General
The basic financial statements included herein have been prepared by
Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations, although Registrant believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of management, all
adjustments necessary for a fair statement of results for the interim period
have been made.
It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto in the latest Annual Report on
Form 10-K of American States Water Company.
Filing Format
This quarterly report on Form 10-Q is a combined report being filed by
two separate Registrants: American States Water Company (hereinafter "AWR") and
Southern California Water Company (hereinafter "SCW"). For more information,
please see Note 1 to the Notes to Financial Statements and the heading entitled
General in Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operation. References in this report to "Registrant" are to AWR
and SCW, collectively unless otherwise specified. SCW makes no representations
as to the information contained in this report relating to AWR and its
subsidiaries, other than SCW.
1
<PAGE> 5
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ----------
(Unaudited)
UTILITY PLANT, at cost (in thousands)
<S> <C> <C>
Water ..................................................................... $ 542,948 $ 532,007
Electric .................................................................. 36,522 36,349
--------- ---------
579,470 568,356
Less - Accumulated depreciation ........................................... (159,552) (151,733)
--------- ---------
419,918 416,623
Construction work in progress ............................................. 43,497 32,972
--------- ---------
463,415 449,595
--------- ---------
OTHER PROPERTY AND INVESTMENTS................................................. 11,496 10,583
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ................................................. 1,605 2,189
Accounts receivable -
Customers, less reserves of $606
in 2000 and $487 in 1999 .............................................. 9,109 10,135
Other ................................................................... 4,855 4,347
Unbilled revenue .......................................................... 12,387 11,345
Materials and supplies, at average cost ................................... 1,331 1,153
Supply cost balancing accounts ............................................ 6,207 4,774
Prepayments and other ..................................................... 4,555 4,851
Accumulated deferred income taxes - net ................................... 6,527 5,546
--------- ---------
46,576 44,340
--------- ---------
EFERRED CHARGES
Regulatory tax-related assets ............................................. 19,045 19,941
Other deferred charges .................................................... 9,717 8,722
--------- ---------
28,762 28,663
--------- ---------
$ 550,249 $ 533,181
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 6
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity ................................................ $159,890 $158,846
Preferred shares ........................................................... 1,600 1,600
Preferred shares subject to mandatory
redemption requirements .................................................. 360 360
Long-term debt ............................................................. 167,192 167,363
-------- --------
329,042 328,169
-------- --------
CURRENT LIABILITIES
Notes payable to banks ..................................................... 37,000 21,000
Long-term debt and preferred shares
due within one year ...................................................... 260 340
Accounts payable ........................................................... 11,903 13,777
Taxes payable .............................................................. 7,481 5,432
Accrued interest ........................................................... 1,886 1,584
Other accrued liabilities .................................................. 11,860 12,832
-------- --------
70,390 54,965
-------- --------
OTHER CREDITS
Advances for construction .................................................. 57,377 57,485
Contributions in aid of construction ....................................... 39,191 38,895
Accumulated deferred income taxes - net .................................... 49,010 48,302
Unamortized investment tax credits ......................................... 3,019 3,064
Regulatory tax-related liability ........................................... 1,839 1,861
Other ...................................................................... 381 440
-------- --------
150,817 150,047
-------- --------
$550,249 $533,181
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 7
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------------
2000 1999
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water .................................................................... $ 42,088 $ 39,210
Electric ................................................................. 3,156 2,818
Other..................................................................... 184 88
-------- --------
45,428 42,116
-------- --------
OPERATING EXPENSES
Water purchased .......................................................... 11,323 7,370
Power purchased for pumping .............................................. 1,589 1,571
Power purchased for resale ............................................... 1,604 2,330
Groundwater production assessment ........................................ 2,020 1,978
Supply cost balancing accounts ........................................... (366) 353
Other operating expenses ................................................. 4,344 3,849
Administrative and general expenses ...................................... 5,999 7,368
Depreciation ............................................................. 3,807 3,380
Maintenance .............................................................. 2,589 1,672
Taxes on income .......................................................... 3,301 3,423
Other taxes .............................................................. 1,693 1,571
-------- --------
37,903 34,865
-------- --------
Operating income ......................................................... 7,525 7,251
OTHER INCOME/(LOSS) .......................................................... (54) 160
-------- --------
Income before interest charges ........................................... 7,471 7,411
INTEREST CHARGES ............................................................. 3,552 3,005
-------- --------
NET INCOME ................................................................... 3,919 4,406
DIVIDENDS ON PREFERRED SHARES ................................................ (22) (22)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ................................... $ 3,897 $ 4,384
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................................ 8,958 8,958
======== ========
Basic Earnings Per Common Share .............................................. $ 0.44 $ 0.49
======== ========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES .................................... 8,986 N/A
======== ========
Diluted earnings per share.................................................... $ 0.43 N/A
======== ========
Dividends Declared Per Common Share .......................................... $ 0.32 $ 0.32
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 8
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ................................................................... $ 76,675 $ 71,423
Electric ................................................................ 7,167 6,691
Other.................................................................... 335 134
-------- --------
84,177 78,248
-------- --------
OPERATING EXPENSES
Water purchased ......................................................... 18,878 14,318
Power purchased for pumping ............................................. 3,050 3,013
Power purchased for resale .............................................. 3,579 3,521
Groundwater production assessment ....................................... 4,273 3,688
Supply cost balancing accounts .......................................... (1,433) (121)
Other operating expenses ................................................ 8,231 7,387
Administrative and general expenses ..................................... 11,912 13,752
Depreciation ............................................................ 7,609 6,890
Maintenance ............................................................. 5,146 3,810
Taxes on income ......................................................... 5,713 5,690
Other taxes ............................................................. 3,492 3,195
-------- --------
70,450 65,143
-------- --------
Operating income ........................................................ 13,727 13,105
OTHER INCOME/(LOSS) ......................................................... (41) 259
-------- --------
Income before interest charges .......................................... 13,686 13,364
INTEREST CHARGES ............................................................ 6,872 5,981
-------- --------
NET INCOME .................................................................. 6,814 7,383
DIVIDENDS ON PREFERRED SHARES ............................................... (43) (44)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .................................. $ 6,771 $ 7,339
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ............................... 8,958 8,958
======== ========
Basic Earnings Per Common Share ............................................. $ 0.76 $ 0.82
======== ========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ................................... 8,972 N/A
======== ========
Diluted earnings per share................................................... $ 0.75 N/A
======== ========
Dividends Declared Per Common Share ......................................... $ 0.64 $ 0.64
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 9
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
--------- ---------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water .................................................................... $ 164,945 $ 147,903
Electric ................................................................. 13,814 13,250
Other..................................................................... 591 199
--------- ---------
179,350 161,352
--------- ---------
OPERATING EXPENSES
Water purchased .......................................................... 40,704 31,726
Power purchased for pumping .............................................. 7,431 7,397
Power purchased for resale ............................................... 7,177 6,091
Groundwater production assessment ........................................ 7,754 7,647
Supply cost balancing accounts ........................................... (1,785) 1,144
Other operating expenses ................................................. 16,437 14,820
Administrative and general expenses ...................................... 26,761 24,992
Depreciation ............................................................. 14,369 13,479
Maintenance .............................................................. 11,135 7,459
Taxes on income .......................................................... 13,368 12,075
Other taxes .............................................................. 6,864 6,322
--------- ---------
150,215 133,152
--------- ---------
Operating income ......................................................... 29,135 28,200
OTHER INCOME/(LOSS) .......................................................... 232 897
--------- ---------
Income before interest charges ........................................... 29,367 29,097
INTEREST CHARGES ............................................................. 13,835 11,700
--------- ---------
NET INCOME ................................................................... 15,532 17,397
DIVIDENDS ON PREFERRED SHARES ................................................ (87) (89)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ................................... $ 15,445 $ 17,308
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................................ 8,958 8,958
========= =========
Basic Earnings Per Common Share .............................................. $ 1.72 $ 1.93
========= =========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES .................................... 8,965 N/A
========= =========
Diluted earnings per share.................................................... $ 1.72 N/A
========= =========
Dividends Declared Per Common Share .......................................... $ 1.28 $ 1.27
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 10
AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
-------- ---------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income ............................................................. $ 6,814 $ 7,383
Adjustments for non-cash items:
Depreciation and amortization ........................................... 7,609 7,018
Deferred income taxes and
investment tax credits .............................................. 556 771
Other - net ........................................................... (3,097) (2,361)
Changes in assets and liabilities:
Accounts receivable ................................................... 1,026 (1,643)
Prepayments ........................................................... 296 446
Supply cost balancing accounts ........................................ (1,433) (122)
Accounts payable ...................................................... (1,874) 4,034
Taxes payable ......................................................... 2,049 1,543
Unbilled revenue ...................................................... (1,042) (1,819)
Other ................................................................. (1,356) 2,198
-------- --------
Net Cash Provided ................................................... 9,548 17,448
-------- --------
Investing Activities:
Construction expenditures ................................................ (21,430) (21,130)
-------- --------
Net Cash Used ...................................................... (21,430) (21,130)
-------- --------
Financing Activities:
Issuance of securities .................................................. 7 40,000
Receipt of advances and contributions ................................... 3,558 3,263
Repayments of long-term debt, net of
redemption of preferred shares ........................................ (252) (30)
Refunds on advances for construction ................................... (2,239) (727)
Changes in notes payable to banks ....................................... 16,000 (32,000)
Common and preferred dividends paid ..................................... (5,776) (5,776)
-------- --------
Net Cash Provided................................................... 11,298 4,730
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ...................... (584) 1,048
Cash and Cash Equivalents, Beginning of period ............................ 2,189 620
-------- --------
Cash and Cash Equivalents, End of period .................................. $ 1,605 $ 1,668
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 11
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
UTILITY PLANT, at cost (in thousands)
Water....................................................................... $542,948 $ 532,007
Electric ................................................................... 36,522 36,349
-------- ---------
579,470 568,356
Less - Accumulated depreciation ............................................ 159,552 (151,733)
-------- ---------
419,918 416,623
Construction work in progress............................................... 43,497 32,972
-------- ---------
463,415 449,595
-------- ---------
OTHER PROPERTY AND INVESTMENTS................................................. 9,914 10,233
-------- ---------
CURRENT ASSETS
Cash and cash equivalents .................................................. 1,239 2,020
Accounts receivable -
Customers, less reserves of $606
in 2000 and $487 in 1999................................................ 9,093 10,135
Other..................................................................... 4,751 4,275
Intercompany receivable..................................................... 1,037 --
Unbilled revenue............................................................ 12,387 11,345
Materials and supplies, at average cost..................................... 1,331 1,153
Supply cost balancing accounts ............................................. 6,207 4,774
Prepayments and other....................................................... 4,555 4,851
Accumulated deferred income taxes - net..................................... 6,559 5,573
-------- ---------
47,159 44,126
-------- ---------
DEFERRED CHARGES
Regulatory tax-related assets .............................................. 19,045 19,941
Other deferred charges ..................................................... 9,594 8,599
-------- ---------
28,639 28,540
-------- ---------
$549,127 $ 532,494
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 12
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity ................................................ $160,636 $160,023
Long-term debt ............................................................. 167,192 167,363
-------- --------
327,828 327,386
-------- --------
CURRENT LIABILITIES
Notes payable to banks ..................................................... 37,000 21,000
Long-term debt and preferred shares
due within one year ...................................................... 260 340
Accounts payable ........................................................... 11,852 13,619
Taxes payable .............................................................. 7,768 5,700
Accrued interest ........................................................... 1,886 1,584
Other accrued liabilities .................................................. 11,731 12,818
-------- --------
70,497 55,061
-------- --------
OTHER CREDITS
Advances for construction .................................................. 57,377 57,485
Contributions in aid of construction ....................................... 39,191 38,895
Accumulated deferred income taxes - net .................................... 49,010 48,302
Unamortized investment tax credits ......................................... 3,019 3,064
Regulatory tax-related liability ........................................... 1,839 1,861
Other ...................................................................... 366 440
-------- --------
150,802 150,047
-------- --------
$549,127 $532,494
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 13
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-------- -------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ..................................................................... $ 42,089 $39,210
Electric .................................................................. 3,156 2,818
-------- -------
45,245 42,028
-------- -------
OPERATING EXPENSES
Water purchased ........................................................... 11,323 7,370
Power purchased for pumping ............................................... 1,589 1,571
Power purchased for resale ................................................ 1,604 2,330
Groundwater production assessment ......................................... 2,020 1,978
Supply cost balancing accounts ............................................ (366) 353
Other operating expenses .................................................. 4,260 3,836
Administrative and general expenses ....................................... 5,810 7,274
Depreciation .............................................................. 3,807 3,380
Maintenance ............................................................... 2,579 1,671
Taxes on income ........................................................... 3,342 3,428
Other taxes ............................................................... 1,691 1,570
-------- -------
37,659 34,761
-------- -------
Operating income .......................................................... 7,586 7,267
OTHER INCOME/(LOSS) ........................................................... (54) 137
-------- -------
Income before interest charges ............................................ 7,532 7,404
INTEREST CHARGES .............................................................. 3,552 3,006
-------- -------
NET INCOME .................................................................... 3,980 4,398
DIVIDENDS ON PREFERRED SHARES ................................................. -- --
-------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .................................... $ 3,980 $ 4,398
======== =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................................. 100 100
======== =======
Basic Earnings Per Common Share ............................................... $ 39,800 $43,980
======== =======
Dividends Declared Per Common Share ........................................... $ 31,000 $30,500
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 14
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
-------- --------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water .................................................................... $ 76,676 $ 71,423
Electric ................................................................. 7,167 6,691
-------- --------
83,843 78,114
-------- --------
OPERATING EXPENSES
Water purchased .......................................................... 18,878 14,318
Power purchased for pumping .............................................. 3,050 3,013
Power purchased for resale ............................................... 3,579 3,521
Groundwater production assessment ........................................ 4,273 3,688
Supply cost balancing accounts ........................................... (1,433) (121)
Other operating expenses ................................................. 8,090 7,364
Administrative and general expenses ...................................... 11,591 13,596
Depreciation ............................................................. 7,609 6,756
Maintenance .............................................................. 5,132 3,808
Taxes on income .......................................................... 5,772 5,744
Other taxes .............................................................. 3,489 3,193
-------- --------
70,030 64,880
-------- --------
Operating income ......................................................... 13,813 13,234
OTHER INCOME/(LOSS) .......................................................... (41) 236
-------- --------
Income before interest charges ........................................... 13,772 13,470
INTEREST CHARGES ............................................................. 6,872 5,982
-------- --------
NET INCOME ................................................................... 6,900 7,488
DIVIDENDS ON PREFERRED SHARES ................................................ -- --
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ................................... $ 6,900 $ 7,488
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................................ 100 100
======== ========
Basic Earnings Per Common Share .............................................. $ 69,000 $ 74,880
======== ========
Dividends Declared Per Common Share .......................................... $ 63,000 $ 61,400
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 15
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
--------- --------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water .................................................................... $ 164,945 $147,902
Electric ................................................................. 13,814 13,250
--------- --------
178,759 161,152
--------- --------
OPERATING EXPENSES
Water purchased .......................................................... 40,704 31,726
Power purchased for pumping .............................................. 7,431 7,397
Power purchased for resale ............................................... 7,177 6,091
Groundwater production assessment ........................................ 7,754 7,647
Supply cost balancing accounts ........................................... (1,785) 1,144
Other operating expenses ................................................. 16,201 14,773
Administrative and general expenses ...................................... 26,072 24,733
Depreciation ............................................................. 14,369 13,077
Maintenance .............................................................. 11,119 7,456
Taxes on income .......................................................... 13,502 12,359
Other taxes .............................................................. 6,859 6,320
--------- --------
149,403 132,723
--------- --------
Operating income ......................................................... 29,356 28,429
OTHER INCOME ................................................................. 232 1,335
--------- --------
Income before interest charges ........................................... 29,588 29,764
INTEREST CHARGES ............................................................. 13,835 11,700
--------- --------
NET INCOME ................................................................... 15,753 18,064
DIVIDENDS ON PREFERRED SHARES ................................................ -- 0
--------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ................................... $ 15,753 $ 18,064
========= ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................................ 100 100
========= ========
Basic Earnings Per Common Share .............................................. $ 157,530 $180,640
========= ========
Dividends Declared Per Common Share .......................................... $ 122,000 $120,287
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 16
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
-------- -------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income ............................................................... $ 6,900 $ 7,488
Adjustments for non-cash items:
Depreciation and amortization ............................................. 7,609 7,017
Deferred income taxes and
investment tax credits ................................................ 551 768
Other - net ............................................................. (1,872) (2,619)
Changes in assets and liabilities:
Accounts receivable ..................................................... (1,042) (1,350)
Prepayments ............................................................. 296 446
Supply cost balancing accounts .......................................... (1,433) (122)
Accounts payable ........................................................ (1,763) 3,716
Taxes payable ........................................................... 2,068 1,601
Unbilled revenue ........................................................ (1,042) (1,819)
Other ................................................................... (392) 2,345
-------- --------
Net Cash Provided ..................................................... 9,880 17,471
-------- --------
Investing Activities:
Construction expenditures .................................................. (21,429) (21,129)
-------- --------
Net Cash Used ........................................................ (21,429) (21,129)
-------- --------
Financing Activities:
Issuance of securities .................................................... -- 40,000
Receipt of advances and contributions ..................................... 3,558 3,263
Repayments of long-term debt, net of
redemption of preferred shares .......................................... (251) (29)
Refunds on advances for construction ..................................... (2,239) (727)
Changes in notes payable to banks ......................................... 16,000 (32,000)
Common and preferred dividends paid ....................................... (6,300) (6,140)
-------- --------
Net Cash Provided (Used)............................................... 10,768 4,367
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ........................ (781) 709
Cash and Cash Equivalents, Beginning of period .............................. 2,020 524
-------- --------
Cash and Cash Equivalents, End of period .................................... $ 1,239 $ 1,233
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 17
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. American States Water Company (AWR) was incorporated in 1998 in
connection with the formation of a holding company by Southern
California Water Company (SCW) and became a public company on July 1,
1998. AWR has no material assets other than the common stock of
Southern California Water Company (SCW). SCW is a public utility
company engaged principally in the purchase, production, distribution
and sale of water, and the distribution and sale of electric energy in
several mountain communities. Unless otherwise stated in this report,
the term Registrant applies to both AWR and SCW, collectively.
2. For a summary of significant accounting policies and other information
relating to these interim financial statements, reference is made to
pages 24 through 31 of the 1999 Annual Report to Shareholders of AWR
under the caption "Notes to Financial Statements."
3. Basic earnings per common share are calculated pursuant to SFAS No. 128
- Earnings per Share - and are based on the weighted average number of
common shares outstanding during each period and net income after
deducting preferred dividend requirements. Under the American States
Water Company 2000 Stock Incentive Plan, stock options representing
41,990 common shares were granted to certain eligible employees on May
1, 2000 and, thus, diluted earnings per share is also shown.
4. On April 22, 1999, the CPUC issued an order denying SCW's application
seeking approval of its recovery through rates of costs associated with
its participation in the Coastal Aqueduct Extension of the State Water
Project (SWP). SCW's participation in the SWP commits it to a 40-year
entitlement with a value of approximately $9.5 million. SCW's
investment in SWP is currently included in Other Property and
Investments. The remaining balance of the related liability of
approximately $7 million is recorded as other long-term debt. SCW
intends to recover its investment in SWP through contributions from
developers on a per-lot or other basis, and, failing that, sale of its
500 acre-foot entitlement in SWP. SCW believes that its full investment
and on-going costs associated with its ownership will be fully
recovered. See the section entitled "Rates and Regulation" for more
information.
5. On June 22, 2000, the CPUC approved the implementation of new rates for
four water ratemaking districts in SCW's Region III and combining
tariff schedules into regional rates for the customer service areas
that make up SCW's Region III, to be effective June 27, 2000. In March
2000, SCW filed applications to increase rates for all of the
ratemaking districts in SCW's Region I as well as to combine those
tariff schedules into regional rates. See the section entitled "Rates
and Regulation" for more information.
6. As permitted by the CPUC, SCW maintains water and electric supply cost
balancing accounts to account for under-collections and
over-collections of revenues designed to recover such costs. Recovery
or refund of such over/under collections are recorded in income when
received from customers and charged to balancing accounts when such
costs are incurred. The balancing accounts are reversed when such costs
are recovered through rate adjustments.
14
<PAGE> 18
7. AWR has two principal business units: a water and electric distribution
unit, through its SCW subsidiary, and a non-regulated activity unit
through the American States Utility Services (ASUS) subsidiary. All
activities currently are geographically located within California,
except for one contract providing customer service and billing services
to a utility located in Arizona. SCW is a regulated utility, which
operates both water and electric systems. AWR has no material
operations other than its SCW subsidiary. On a stand-alone basis, AWR
has no material assets other than its investments in its subsidiaries.
The tables below set forth information relating to SCW's operating
segments. SCW manages its operations on a regional basis using the five
categories below as broad-level measures of profitability. Region I
incorporates service areas in northern and central California; Region
II contains service areas throughout Los Angeles; Region III
encompasses water operations in eastern Los Angles County, Orange
County, San Bernardino County and Imperial County. SCW also provides
electric service to the City of Big Bear Lake and surrounding areas.
Included in the amounts set forth, certain assets, revenues and
expenses have been allocated. The identifiable assets are net of
respective accumulated provisions for depreciation.
<TABLE>
<CAPTION>
(dollars in thousands) For The Three Months Ended June 30, 2000
------------------------------------------------------------------------------------------------------
Water Electric Total
------------------------------------
Region I Region II Region III SCW
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 7,519 $ 18,384 $ 16,186 $ 3,156 $ 45,245
Operating income before income taxes 2,055 4,143 4,017 713 $ 10,928
Identifiable assets 111,891 145,199 180,465 25,860 $463,415
Depreciation expense 732 1,200 1,525 350 $ 3,807
Capital additions $ 1,811 $ 5,082 $ 3,199 $ 335 $ 10,427
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Three Months Ended June 30,1999
------------------------------------------------------------------------------------------------------
Water Electric Total
------------------------------------
Region I Region II Region III SCW
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 6,809 $ 17,795 $ 14,606 $ 2,818 $ 42,028
Operating income before income taxes 1,508 4,856 3,666 665 $ 10,695
Identifiable assets 103,075 131,022 172,537 25,234 $431,868
Depreciation expense 684 1,011 1,349 336 $ 3,380
Capital additions $ 2,036 $ 6,148 $ 4,009 $ 486 $ 12,679
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Six Months Ended June 30, 2000
------------------------------------------------------------------------------------------------------
Water Electric Total
------------------------------------
Region I Region II Region III SCW
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 12,991 $ 35,322 $ 28,363 $ 7,167 $ 83,843
Operating income before income taxes 3,033 7,650 6,772 2,130 $ 19,585
Identifiable assets 111,891 145,199 180,465 25,860 $463,415
Depreciation expense 1,463 2,401 3,045 700 $ 7,609
Capital additions $ 5,764 $ 7,870 $ 6,349 $ 912 $ 20,895
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Six Months Ended June 30, 1999
------------------------------------------------------------------------------------------------------
Water Electric Total
------------------------------------
Region I Region II Region III SCW
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 12,131 $ 32,669 $ 26,623 $ 6,691 $ 78,114
Operating income before income taxes 2,326 7,769 6,585 2,298 $ 18,978
Identifiable assets 103,075 131,022 172,537 25,234 $431,868
Depreciation expense 1,368 2,019 2,697 672 $ 6,756
Capital additions $ 5,758 $ 10,456 $ 6,401 $ 958 $ 23,573
</TABLE>
15
<PAGE> 19
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended June 30, 2000
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Water Electric Total
------------------------------------
Region I Region II Region III SCW
-----------------------------------------------------------
Operating revenues $ 28,082 $ 73,427 $ 63,436 $13,814 $178,759
Operating income before income taxes 7,274 15,722 16,210 3,652 $ 42,858
Identifiable assets 111,891 145,199 180,465 25,860 $463,415
Depreciation expense 2,831 4,423 5,743 1,372 $ 14,369
Capital additions $ 12,972 $ 19,339 $ 14,461 $ 2,127 $ 48,899
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended June 30, 1999
------------------------------------------------------------------------------------------------------
Water Electric Total
------------------------------------
Region I Region II Region III SCW
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 26,525 $ 63,862 $ 57,515 $13,250 $161,152
Operating income before income taxes 6,784 14,088 15,866 4,050 $ 40,788
Identifiable assets 103,075 131,022 172,537 25,234 $431,868
Depreciation expense 2,646 3,705 4,938 1,788 $ 13,077
Capital additions $ 11,330 $ 18,983 $ 15,110 $ 1,798 $ 47,221
</TABLE>
8. On March 10, 2000, Registrant entered into an agreement to acquire the
common stock of Chaparral City Water Company, a privately operated
water company serving approximately 10,000 customers in the town of
Fountain Hills, Arizona and portions of Scottsdale, Arizona for an
aggregate value of $31.2 million, including assumption of approximately
$12 million in debt. The acquisition will be temporarily funded with a
combination of common equity and short-term debt. After taking into
account the continuing long-term debt obligations of Chaparral that
will be reflected on the consolidated balance sheet of the Registrant
after the closing of the transaction, the transaction will be
permanently financed with approximately 50% common equity and the
balance with long-term debt.
Chaparral City Water Company was purchased from MCO Properties Inc., a
wholly owned subsidiary of MAXXAM Inc. This marks the first acquisition
outside of California for Registrant. The sale of Chaparral City Water
Company requires notification to the Arizona Corporation Commission and
other conditions customary in transactions of this type. The approval
of Registrant's shareholders is not required. It is anticipated that
the transaction will close before December 2000.
16
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report (including any documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the "safe harbor" from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements can
generally be identified as such because the context of the statement will
include words such as the Company or Registrant "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe
Registrant's future plans, objectives, estimates or goals are also
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
in the statements. Such statements address future events and conditions
concerning capital expenditures, earnings, litigation, rates, water quality and
other regulatory matters, adequacy of water supplies, liquidity and capital
resources, opportunities related to operations of municipally-owned water
systems and accounting matters. Actual results in each case could differ
materially from those currently anticipated in such statements, by reason of
factors such as utility restructuring, including ongoing local, state and
federal activities; future economic conditions, including changes in customer
demand and changes in market conditions for debt and equity; future climatic
conditions; legislative, regulatory and other circumstances affecting
anticipated revenues and costs; the number and effectiveness of competitors in
Registrant's markets; changes in legislation; the nature and pace of
technological changes; Registrant's ability to identify future markets and
successfully expand existing ones; the mix of products and services offered in
Registrant's target markets; and abilities of other companies to remain or
become year 2000 ready. These important factors should be considered in
evaluating any statement contained herein and/or made by Registrant or on its
behalf.
GENERAL
American States Water Company (AWR) was incorporated in 1998 in
connection with the formation of a holding company by Southern California Water
Company (SCW) and became a public company on July 1, 1998. AWR has no material
assets other than the common stock of SCW. SCW is a public utility company
engaged principally in the purchase, production, distribution and sale of water
(SIC No. 4941). SCW also distributes electricity in one customer service area
(SIC No. 4911). SCW is regulated by the California Public Utilities Commission
(CPUC) and was incorporated on December 31, 1929 under the laws of the State of
California. AWR has another subsidiary, American States Utility Services, Inc.
(ASUS) which contracts to lease, operate and maintain governmentally owned water
and wastewater systems and to provide other services to local governments to
assist them in the operation and maintenance of their water and wastewater
systems. As of June 30, 2000, ASUS provided billing and other customer service
functions to approximately 90,000 customers. Neither AWR nor ASUS are regulated
by the CPUC.
SCW is organized into three regions and one electric customer service
area operating within 75 communities in 10 counties in the State of California
and provides water service in 21 customer service areas (CSAs). Region I
incorporates 7 CSAs in northern and central California; Region II has 4 CSAs
located in Los Angeles; Region III incorporates 10 water CSA's.
SCW also provides electric service to the City of Big Bear Lake and
surrounding areas in San Bernardino County. All electric energy sold by SCW to
customers in its Bear Valley Electric CSA was purchased under an energy
brokerage contract with Sempra Energy Corporation from March 26, 1996 to May 1,
1999, then with Illinova Energy Partners (Illinova) from May 1, 1999 to April
30, 2000, and with Dynegy Energy Services (Dynegy) since May 1, 2000 as a result
of the merger of Dynegy and Illinova.
17
<PAGE> 21
SCW served 244,593 water customers and 21,249 electric customers at
June 30, 2000, or a total of 265,842 customers, compared with 264,230 total
customers at June 30, 1999.
SCW's utility operations exhibit seasonal trends. Although SCW's water
utility operations have a diversified customer base, revenues derived from
commercial and residential water customers accounted for approximately 86.1%,
90.7% and 90.6% of total water revenues for the three, six and twelve months
ended June 30, 2000, respectively as compared to 86.6%, 90.0% and 90.6% for the
three, six and twelve months ended June 30, 1999, respectively.
ACQUISITION OF PEERLESS WATER CO.
In December 1999, Registrant agreed to acquire Peerless Water Co., a
privately owned water company in Bellflower, California, subject to satisfaction
of certain conditions, including CPUC approval. The number of Common Shares to
be issued will be determined at the closing, but will in no event be greater
than 131,036 shares nor less than 107,538 shares. The transaction, if approved
by the CPUC, is anticipated to close before the second quarter of 2001.
ACQUISITION OF CHAPARRAL CITY WATER COMPANY
On March 10, 2000, Registrant entered into an agreement to acquire the
common stock of Chaparral City Water Company, a privately operated water company
serving approximately 10,000 customers in the town of Fountain Hills, Arizona
and portions of Scottsdale, Arizona for an aggregate value of $31.2 million,
including assumption of approximately $12 million in debt. The acquisition will
be temporarily funded with a combination of common equity and short-term debt.
After taking into account the continuing long-term debt obligations of Chaparral
that will be reflected on the consolidated balance sheet of the Registrant after
the closing of the transaction, the transaction will be permanently financed
with approximately 50% common equity and the balance with long-term debt.
Chaparral City Water Company was purchased from MCO Properties Inc., a
wholly owned subsidiary of MAXXAM Inc. This marks the first acquisition outside
of California for Registrant. The sale of Chaparral City Water Company requires
notification to the Arizona Corporation Commission and other conditions
customary in transactions of this type. The approval of Registrant's
shareholders is not required. It is anticipated that the transaction will close
before December 2000. See Notes to Financial Statements for more information.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended June 30,
2000 decreased by 10.2% to $0.44 per share as compared to $0.49 per share for
the comparable period last year. Basic per common share for the six months ended
June 30, 2000 decreased by 7.3% to $0.76 per share as compared to $0.82 per
share for the comparable period last year. Basic and fully diluted earnings for
the twelve months ended June 30, 2000 decreased by 10.9% to $1.72 per share as
compared to $1.93 per share for the twelve months ended June 30, 1999. The
decrease in the recorded results reflects various reasons as is more fully
discussed below. Fully diluted earnings per share for the three, six and twelve
months ended June 30, 2000 are $0.43, $0.75 and $1.72 per share, respectively.
Registrant had no dilutive securities outstanding in the same periods of 1999
and, accordingly, diluted earnings per share are not applicable for those
periods.
Water sales for the three, six and twelve months ended June 30, 2000
were 8.7%, 6.6%, and 4.9% higher than the same periods of last year,
respectively. As compared to the same periods ended June 30, 1999, water
operating revenues increased by 7.3%, 7.4% and 11.5% for the three, six and
twelve months
18
<PAGE> 22
ended June 30, 2000, respectively, due to the increased water sales and
increases in rates authorized by the CPUC. Additional increases in revenues for
the twelve months ended June 2000 reflected the general rate case (GRC) increase
for Registrant's Metropolitan customer service area effective January 1, 1999.
New rates in four customer service areas and implementation of regional rates in
the customer service areas that comprise SCW's Region III, anticipated to be
implemented in January 2000, were not authorized by the CPUC until June 27,
2000. The delay in implementation resulted in a loss of approximately $1,400,000
in revenues for the six months ended June 30, 2000. See the section entitled
"Rates and Regulation" for more information.
Kilowatt-hour sales of electricity increased by 8.7%, 4.6% and 3.2%,
respectively, for the three, six and twelve months ended June 30, 2000 as
compared to the same periods ended June 30, 1999 due principally to an increase
in sales to commercial customers. As a result of increased sales, electric
operating revenues for the three, six and twelve months ended June 30, 2000
increased by 12.0%, 7.1% and 4.3%, respectively.
Other revenues increased by more than 100% for the three, six and
twelve months ended June 30, 2000 due to new ASUS service contracts and
increased activities with existing contracts.
Purchased water costs increased by 53.6% and 31.8%, respectively, for
the three and six months ended June 30, 2000 as compared to the same periods
ending in 1999 reflecting increases of 22.2% and 15.8%, respectively, in
purchased water resulting from higher sales. The comparison is also affected by
a refund of $1.6 million from the Water Replenishment District of Southern
California (WRD) received by SCW in second quarter of 1999. There was no similar
refund received in the comparable periods of 2000. As compared to the twelve
months ended June 30, 1999, purchased water costs increased by 28.3% reflecting
a 12.6% increase in purchased water and a total of $3.1 million in refunds from
WRD received during the twelve months ended June 30, 1999. There were no similar
refunds received during the twelve months ended June 30, 2000. The twelve-month
comparison was also affected by a decline in the receipt of reimbursements from
potentially responsible parties related to contamination in SCW's Culver City
CSA. Registrant received approximately $1,145,000 during the twelve months ended
June 30, 1999 as compared to reimbursements of $132,000 received during the same
period ended June 30, 2000. See the section entitled "Environmental Matters -
Matters Related to Culver City System."
Cost of power purchased for pumping increased by 1.1%, 1.2% and 0.5%
for the three, six and twelve months ended June 30, 2000, respectively, due to
an increase in groundwater in Registrant's supply mix.
As compared to the three months ended June 30, 1999, the cost of power
purchased for resale decreased by 31.2% due to additional demand charges
recorded in April 1999 from Registrant's energy supplier in 1999. There were no
additional demand charges recorded in the three months ended June 30, 2000. The
cost of power purchased for resale increased by 17.8% for the twelve months
ended June 30, 2000 due primarily to additional demand charges from Registrant's
energy supplier.
Groundwater production assessments are 2.1%, 15.9% and 1.4%, higher for
the three, six and twelve months ended June 30, 2000, respectively, reflecting
slightly increased volumes in groundwater pumping. The six month comparison is
also affected by accrual recorded in March 2000 to reflect excess pumping
assessments associated with increased pumping in SCW's San Dimas and San Gabriel
customer service areas. Excess groundwater production assessments are offset
through the balancing account and will be recovered in future offset rate
increases. See the section entitled "Regulatory Matters" for more information.
19
<PAGE> 23
A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. Registrant currently has a
net under-collected position. A net under-collection of balancing accounts for
the three, six and twelve months ended June 30, 2000 reflects previously
discussed increase in energy demand charges and excess pumping penalty accruals.
As compared to the twelve months ended June 30, 1999, the effect of increased
energy demand charges for the twelve months ended June 2000 was partially offset
by new rates effective January 1999 authorized to implement new supply costs and
to increase collection of previously under-collected costs. The WRD refunds for
the periods ending June 1999 as discussed previously also helped to decrease
previously under-collected supply costs in 1999.
Other operating expenses increased by 12.9%, 11.4% and 10.9% for the
three, six and twelve months ended June 30, 2000, respectively, as compared to
the same periods of last year. The increases were due to increased costs for
water treatment, increased accruals for uncollectible accounts resulting from
the increased revenues and increases in labor and billing costs due to
additional billing and customer service contracts obtained by ASUS.
Administrative and general expenses decreased by 18.6% and 13.4% for
the three and six months ended June 30, 2000, respectively, as compared to the
same period ended June 30, 1999 due primarily to reduced reserves for litigation
booked in 2000 and a reduction in pension expenses. As compared to the twelve
months ended June 30, 1999, administrative and general expenses increased by
7.1% due to higher regulatory commission fees resulting from increased revenues,
accruals related to employees benefits and increased consulting services. See
the section entitled "Legal Proceedings" for more information.
Depreciation expense increased by 12.6%, 10.4% and 6.6%, respectively,
for the three, six and twelve months ended June 30, 2000 reflecting, among other
things, the effects of recording approximately $52 million in net plant
additions during 1999, depreciation on which began in January 2000. In addition,
amortization of start-up and organizational costs associated with the formation
of AWR was reflected in the twelve months ended June 30, 1999. There were no
similar amortization costs for the twelve months ended June 30, 2000.
As compared to the three, six and twelve months ended June 30, 1999,
maintenance expense increased by 54.8%, 35.1% and 49.3%, respectively, due to
increased maintenance on Registrant's water supply sources and maintenance of
water mains. The comparisons are also largely affected by the timing differences
in carrying out maintenance projects. Registrant incurred significant
maintenance expense in the fourth quarter of 1999 as Registrant focused on
capital projects during the first part of 1999. The wet weather conditions
during 1998 also hampered planned maintenance activities, thereby impacting
maintenance for the twelve months ended June 30, 1999.
Taxes on income decreased by 3.6% for the three months, and increased
by 0.4% and 10.7% for the six and twelve months ended June 30, 2000,
respectively, as compared to the three, six and twelve months ended June 30,
1999 due to a higher effective tax rate resulting from the turn-around of
depreciation-related temporary differences, the benefits of which were
previously flowed-through for rate-making purposes. The three and six-month
comparisons were also affected by lower pre-tax operating income.
Other taxes increased by 7.8%, 9.3% and 8.6%, respectively, for the
three, six and twelve months ended June 30, 2000, respectively, as compared to
the same periods last year reflecting increased franchise fee payments resulting
from higher revenues, increased property taxes due to higher property valuation
assessments, and increased payroll taxes due to higher labor and labor-related
costs.
20
<PAGE> 24
As compared to the same periods ended June 30, 1999, other income for
the three, six and twelve months ended June 30, 2000 was lower. The decrease was
due to the effect of recording the State Water Project entitlement with a value
of approximately $9.5 million, amortization on which began January 2000. The
twelve-month comparison was affected by the flow-through of tax benefits related
to refinancing of long-term debt in December 1998. There were no similarly
flowed-through tax benefits for the twelve months ended June 2000. See the
section entitled "Rates and Regulation" for more information.
Interest expense increased by 18.2%, 14.9% and 18.2%, respectively, for
the three, six and twelve months ended June 30, 2000 as compared to the three,
six and twelve months ended June 30, 1999, primarily due to additional
short-term borrowing to finance construction expenditures. The issuance of $40
million in long-term debt in January 1999 also affected the twelve-month
comparison.
LIQUIDITY AND CAPITAL RESOURCES
AWR funds its operating expenses, dividends on its outstanding Common
and Preferred Shares, and makes its mandatory sinking fund payments, principally
through dividends from SCW. AWR has filed a Registration Statement with the
Securities and Exchange Commission (SEC) for issuance, from time to time, of up
to $60 million in Common Shares, Preferred Shares and/or debt securities. The
proceeds will be used primarily for investment in its subsidiaries. No
securities had been issued under this Registration Statement as of June 30,
2000, although Registrant anticipates completion of an equity offering during
the third quarter of 2000.
SCW funds the majority of its operating expenses, interest payments on
its debt and dividends on its outstanding Common Shares through internal
sources. SCW continues to rely on external sources, including short-term bank
borrowing, contributions-in-aid-of-construction, advances for construction and
install-and-convey advances, to fund the majority of its construction
expenditures.
Because of the seasonal nature of its water and electric operations,
SCW utilizes its short-term borrowing capacity to finance current operating
expenses. The aggregate short-term borrowing capacity available to SCW under its
three bank lines of credit was $47 million as of June 30, 2000, of which a total
of $37 million was outstanding. SCW routinely employs short-term bank borrowing
as an interim financing source prior to funding capital expenditures on a
long-term basis.
In 1998, SCW filed a Registration Statement with the SEC for issuance,
from time to time, of up to $60 million in long-term debt. As of June 30, 2000,
$20 million was available for issuance.
SCW's construction program is designed to ensure its customers high
quality service. SCW maintains an ongoing distribution main replacement program
throughout its customer service areas, based on the priority of leaks detected,
fire protection enhancement and a reflection of the underlying replacement
schedule. In addition, SCW upgrades its electric and water supply facilities in
accordance with industry standards, local requirements and CPUC requirements.
SCW's Board of Directors has approved anticipated net capital expenditures of
approximately $55.4 million for 2000. Of the amount authorized, $17.9 million
has incurred as of June 30, 2000.
Neither AWR nor ASUS have material capital commitments; however, ASUS
actively seeks opportunities to own, lease or operate municipal water and
wastewater systems, which may involve significant capital commitments.
21
<PAGE> 25
WATER SUPPLY
For the three months ended June 30, 2000, SCW supplied a total of
23,954,000 ccf of water as compared to 21,359,000 ccf for the three months ended
June 30, 1999. Of the total 23,954,000 ccf of water supplied during the second
quarter of 2000, approximately 55.8% came from pumped sources and 41.7% was
purchased from others, principally the Metropolitan Water District of Southern
California (MWD) and its member agencies. The remaining 2.5% of total supply
came from the United States Bureau of Reclamation (the "Bureau) under a no-cost
contract. For the three months ended June 30, 1999, 60.1%, 38.3%, and 1.6% was
supplied from pumped sources, purchased from MWD and the Bureau, respectively.
For the six months ended June 30, 2000, SCW supplied a total of
40,495,000 ccf of water, 57.7% of which came from pumped sources, 40.8% was
purchased and the remaining amount was supplied by the Bureau. During the six
months ended June 30, 1999, SCW produced 37,477,000 ccf of water. Of this amount
61.0% came from pumped sources, 38.1% was purchased and the remainder was
provided by the Bureau.
During the twelve months ended June 30, 2000, SCW supplied 88,346,000
ccf of water as compared to 83,219,000 ccf supplied during the twelve months
ended June 30, 1999. During the twelve months ended June 30, 2000, pumped
sources provided 56.8% of total supply, 41.4% was purchased from MWD and its
member agencies. The remaining 1.8% of total supply came from the Bureau. For
the twelve months ended June 30, 1999, 60.5%, 39.0% and 0.5%, respectively, was
supplied from pumped sources, purchased from MWD and the Bureau.
The MWD is a water district organized under the laws of the State of
California for the purpose of delivering imported water to areas within its
jurisdiction. Registrant has 52 connections to the water distribution facilities
of MWD and other municipal water agencies. MWD imports water from two principal
sources: the Colorado River and the State Water Project (SWP). Available water
supplies from the Colorado River and the SWP have historically been sufficient
to meet most of MWD's requirements and MWD's supplies from these sources are
anticipated to remain adequate through 2000. MWD's import of water from the
Colorado River is expected to decrease in future years due to the requirements
of the Central Arizona Project. In response, MWD has taken a number of steps to
secure additional storage capacity and to increase available water supplies, by
effecting transfers of water rights from other sources.
Registrant's water supply and revenues are significantly affected, both
in the short-run and the long run, by changes in meteorological conditions.
Registrant's water supplies remain adequate to meet anticipated requirements.
State reservoirs are at 86% of capacity, which is 113% of average for this time
of year. Although overall groundwater conditions remain at adequate levels,
certain of SCW's groundwater supplies have been affected to varying degrees by
various forms of contamination which, in some cases, have caused increased
reliance on purchased water in its supply mix.
REGULATORY MATTERS
SCW is subject to regulation by the CPUC, which has broad powers with
respect to service and facilities, rates, classifications of accounts, valuation
of properties, the purchase, disposition and mortgaging of properties necessary
or useful in rendering public utility service, the issuance of securities, the
granting of certificates of convenience and necessity as to the extension of
services and facilities and various other matters. AWR and ASUS are not
regulated by the CPUC. The CPUC does, however, regulate certain transactions
between SCW and its non-regulated affiliates.
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The 22 customer service areas (CSAs) of SCW are grouped into 16 water
districts and 1 electric district for ratemaking purposes. Water rates vary
among the 16 ratemaking districts due to differences in operating conditions and
costs. SCW monitors operations on a regional basis in each of these districts so
that applications for rate changes may be filed, when warranted. Under the
CPUC's practices, rates may be increased by three methods: general rate case
increases (GRC's), offsets for certain expense increases and advice letter
filings related to certain plant additions. GRC's are typically for three-year
periods, which include step increases for the second and third year. Rates are
based on a forecast of expenses and capital costs. GRC's have a typical
regulatory lag of one year. Offset rate increases typically have a two to four
month regulatory lag.
GRC step increase for Metropolitan CSA and General Office Allocation
step increases for Arden-Cordova, Bay Point, Simi Valley and Santa Maria CSAs
were effective beginning January, 2000. Step increase for Ojai became effective
April 23, 2000. Attrition increases for Arden-Cordova and Bay Point CSAs were
also in effect beginning January 2000.
Effective June 27, 2000, SCW was authorized by the CPUC to implement
new increased rates for four water ratemaking districts in SCW's Region III and
to combine tariff schedules into regional rates for the customer service areas
that make up SCW's Region III. Despite the delay, which resulted in a loss of
approximately $1.4 million in revenues for the six months ended June 30, 2000,
the new rates are anticipated to generate approximately $2.5 million in
additional revenues during the third and fourth quarters of 2000.
Applications to increase water rates by approximately $5.8 million for
ratemaking districts in SCW's Region I as well as to combine those tariff
schedules into regional rates were filed in March 2000. The new rates, if
authorized in total or in part by the CPUC, would be effective January 1, 2001.
An advice letter was filed with the CPUC on March 1, 2000 seeking
recovery of capital expenditures associated with Y2K readiness, not already
included in Registrant's water rates. Registrant is unable to predict if the
CPUC will authorize recovery of any or all of the costs. See the section
entitled "Year 2000 Issue" for more information.
SCW has applications pending to provide water and wastewater services
to a new housing development in Orange County and to provide water services to a
new housing development in San Luis Obispo County. The hearing examiner assigned
to SCW's application for the new housing development in Orange County has
recommended approval of the application. A final decision by the CPUC is
expected in the fourth quarter of 2000. Hearings on the application for the new
housing development in San Luis Obispo County are scheduled for December 2000. A
final decision by the CPUC is expected in the second quarter of 2001.
On July 6, 2000, the CPUC concluded its Order Instituting Rulemaking on
its own motion to set rules and to provide guidelines for the privatization and
excess capacity as it relates to investor owned water companies, including
Registrant. The CPUC's order establishes a mechanism for sharing gross revenues,
after pass-through of certain expenses, between customers of SCW and
shareholders of Registrant. The order also requires water utilities, including
Registrant, to file an advice letter with the CPUC for approval of services that
utilize, in whole or in part, assets or employees reflected in the utility's
revenue requirements.
On April 22, 1999, the CPUC issued an order denying SCW's application
seeking approval of its recovery through rates of costs associated with its
participation in the Coastal Aqueduct Extension of the State Water Project
(SWP). SCW's participation in the SWP commits it to a 40-year entitlement.
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SCW's investment of approximately $9.5 million in SWP is currently included in
Other Property and Investments. The remaining balance of the related liability
of approximately $7 million is recorded as other long-term debt. SCW intends to
recover its investment in SWP either through contributions from developers on a
per-lot or other basis, or from the sale of its 500 acre-foot entitlement in
SWP. See the Notes to Financial Statements for more information.
ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the 1996 SDWA amendments) to the Safe
Drinking Water Act (the SDWA) were signed into law. The 1996 SDWA revised the
1986 amendments to the SDWA with a new process for selecting and regulating
contaminants. The U. S. Environmental Protection Agency (EPA) can only regulate
contaminants that may have adverse health effects, are known or likely to occur
at levels of public health concern, and the regulation of which will provide "a
meaningful opportunity for health risk reduction." The EPA has published a list
of contaminants for possible regulation and must update that list every five
years. In addition, every five years, the EPA must select at least five
contaminants on that list and determine whether to regulate them. The new law
allows the EPA to bypass the selection process and adopt interim regulations for
contaminants in order to address urgent health threats. Current regulations,
however, remain in place and are not subject to the new standard-setting
provisions. The DOHS, acting on behalf of the EPA, administers the EPA's program
in California.
The 1996 SDWA amendments allow the EPA for the first time to base
primary drinking water regulations on risk assessment and cost/benefit
considerations and on minimizing overall risk. The EPA must base regulations on
best available, peer-reviewed science and data from best available methods. For
proposed regulations that involve the setting of maximum contaminant levels
(MCL's), the EPA must use, and seek public comment on, an analysis of
quantifiable and non-quantifiable risk-reduction benefits and cost for each such
MCL.
SCW currently tests its wells and water systems according to
requirements listed in the SDWA. Water from wells found to contain levels of
contaminants above the established MCLs is treated to reduce contaminants to
acceptable levels before it is delivered to customers.
Since the SDWA became effective, SCW has experienced increased
operating costs for testing to determine the levels, if any, of the constituents
in SCW's sources of supply and additional expense to lower the level of any
contaminants in order to meet the MCL standards. Such costs and the costs of
controlling any other contaminants may cause SCW to experience additional
capital costs as well as increased operating costs.
Registrant is currently unable to predict the ultimate impact that the
1996 SDWA amendments might have on its financial position or its results of
operation. The CPUC ratemaking process provides SCW with the opportunity to
recover prudently incurred capital and operating costs associated with water
quality. Management believes that such incurred costs will be authorized for
recovery by the CPUC.
Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment
Rule (ESWTR), which would require increased surface-water treatment to decrease
the risk of microbial contamination. The EPA has proposed several versions of
the ESWTR for promulgation. The version selected for promulgation will be
determined based on data collected by certain water suppliers and forwarded to
the EPA pursuant to EPA's Information Collection Rule, which requires such water
suppliers to monitor
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microbial and other contaminants in their water supplies and to conduct certain
tests in respect of such contaminants. The EPA has adopted an Interim ESWTR
applicable only to systems serving greater than 10,000 persons. On April 10,
2000, EPA published the proposed Long Term 1 Enhanced Surface Water Treatment
Rule and Filter Backwash Rule (LT1FBR) in the Federal Register. This proposed
rule will apply to each of SCW's five surface water treatment plants and
basically extends the requirements of the ESWTR to systems serving less than
10,000 persons and will require some systems to institute changes to the return
of recycle filter backwash flows within the treatment process to reduce the
effects of recycle on compromising microbial control. Registrant is presently
unable to predict the ultimate impact of the LT1FBR, but it is anticipated that
all five plants will achieve compliance within the three year to five-year time
frames identified by EPA.
Regulation of Disinfection/Disinfection By-Products
Registrant is also subject to the new regulations concerning
disinfection/disinfection by-products (DBP's), Stage I of which regulations were
effective in November, 1998 with full compliance required by 2001. Stage I
requires reduction of trihalomethane contaminants from 100 micrograms per liter
to 80 micrograms per liter. Two of SCW's systems are immediately impacted by
this rule. SCW implemented modifications to the treatment process in its Bay
Point and Cordova systems. It is anticipated that both systems will be in full
compliance by 2001. A third SCW plant will require treatment modifications in
order to comply with this rule. The Registrant is preparing to conduct studies
in Calipatria to determine the best treatment methods to comply with this rule.
The EPA must adopt Stage II rules pertaining to DBPs, according to a
negotiated schedule by 2000. The EPA is not allowed to use the new cost/benefit
analysis provided for in the 1996 SDWA amendments for establishing the Stage II
rules applicable to DBPs but may utilize the regulatory negotiating process
provided for in the 1996 SDWA amendments to develop the Stage II rule. The final
rule is expected by 2002.
Ground Water Rule
On May 10, 2000, the EPA published the proposed Ground Water Rule
(GWR), which establishes multiple barriers to protect against bacteria and
viruses in drinking water systems that use ground water. The proposed rule will
apply to all U.S. public water systems that use ground water as a source. The
proposed GWR includes system sanitary surveys conducted by the state to identify
significant deficiencies; hydrogeologic sensitivity assessments for
undisinfected systems, source water microbial monitoring by systems that do not
disinfect and draw from hydrogeologically sensitive aquifer or have detected
fecal indicators within the system's distribution system; corrective action; and
compliance monitoring for systems which disinfect to ensure that they reliably
achieve 4-log (99.99%) inactivation or removal of viruses. The GWR is scheduled
to be issued as a final regulation in November 2000. While no assurance can be
given as to the nature and cost of any additional compliance measures, if any,
Registrant does not believe that such regulations will impose significant
compliance costs, since SCW already currently engages in disinfection of its
groundwater systems.
Regulation of Radon and Arsenic
Registrant expects to be subject to new regulations regarding radon and
arsenic. It is anticipated that the EPA will propose a reduction in the federal
standard on arsenic from 50 parts per billion (ppb) to 5 ppb. The proposed
arsenic rule was published in the Federal Register on June 22, 2000. EPA
proposed 5 ppb as the lead regulatory option, but will take comments on 3 ppb
and 10 ppb options as well. Compliance with an MCL of 5 ppb will require
Registrant to implement costly well-head
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treatment remedies such as ion exchange or, alternatively, to purchase
additional and more expensive water supplies already in compliance, for blending
with well sources.
The EPA has proposed new radon regulations following a National Academy
of Sciences risk assessment and study of risk-reduction benefits associated with
various mitigation measures. The National Academy of Sciences study is in
agreement with much of EPA's original findings but has slightly reduced the
ingestion risk initially assumed by EPA. EPA established an MCL of 300 Pico
Curies per liter based on the findings and has also established an alternative
MCL of 4000 Pico Curies per liter, based upon potential mitigation measures for
overall radon reduction. The final rule will be effective in August 2000. The
Registrant is currently conducting studies to determine the best treatment for
affected wells.
Voluntary Efforts to Exceed Minimum Surface Water Treatment
Requirements
SCW is a voluntary member of the EPA's "Partnership for Safe Water", a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic organisms. As a volunteer in the program,
SCW commits to exceed minimum operating requirements governing surface water
treatment, optimize surface water treatment plant operations and ensure that its
surface water treatment facilities are performing as efficiently as possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733, which
requires fluoridation of water supplies for public water systems serving more
than 10,000 service connections. Although the bill requires affected systems to
install treatment facilities only when public funds have been made available to
cover capital and operating costs, the bill requires the CPUC to authorize cost
recovery through rates should public funds for operation of the facilities, once
installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
In January 1997, SCW was notified that ammonium perchlorate in amounts
above the state-determined action level had been detected in three of its 27
wells serving its Arden-Cordova system. Aerojet-General Corp. has, in the past,
used ammonium perchlorate in their processing as an oxidizer of rocket fuels.
SCW took the three wells detected with ammonium perchlorate out of service at
that time. Although neither the EPA nor the DOHS has established a drinking
water standard for ammonium perchlorate, DOHS has established an action level of
18 parts per billion (ppb) which required SCW to notify customers in its
Arden-Cordova customer service area of detection of ammonium perchlorate in
amounts in excess of this action level. In April 1997, SCW found ammonium
perchlorate in three additional wells and, at that time, removed those wells
from service until it was determined that the levels were below the
state-determined action level. Those wells were returned to service. SCW
periodically monitors these wells to determine that levels of perchlorate are
below the action level currently in effect.
In February 1998, SCW was informed that nitrosodimethylamine (NDMA) had
been detected in amounts in excess of the EPA reference dosage for health risks
in four of its wells in its Arden-Cordova system. The wells have been removed
from service. Another well was also been removed from service in end of
September 1999 due to the contamination. NDMA is an additional by-product from
the production of rocket fuel and it is believed that such contamination is
related to the activities of Aerojet-General Corp. Aerojet-General Corp. has
reimbursed SCW for constructing a pipeline to interconnect with the City of
Folsom water system to provide an alternative source(s) of water supply in SCW's
Arden-Cordova customer service area and has reimbursed SCW for costs associated
with the drilling and equipping of two new wells. As of June 30, 2000,
Aerojet-General Corp. has previously reimbursed Registrant $4.5
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million. The remainder of the costs is subject to further reimbursement,
including interest. The reimbursement from Aerojet-General Corp. reduces SCW's
utility plant and costs of purchased water.
On October 25, 1999, SCW filed a lawsuit against the California
Regional Water Quality Control Board (CRWQCB) alleging that the CRWQCB has
willfully allowed portions of the Sacramento County Groundwater Basin to be
injected with chemical pollution that is contaminating the underground water
supply in SCW's Rancho Cordova customer service area. In a separate case, also
filed on October 25, 1999, SCW sued Aerojet General Corp. for causing the
contamination. On March 22, 2000 Aerojet General Corp. filed a cross complaint
against SCW for negligence and constituting a public nuisance. Registrant is
unable to determine at this time what, if any, potential liability it may have
with respect to the cross complaint, but intends to vigorously defend itself
against these allegations. Management cannot predict the outcome of these
proceedings. See the section entitled "Legal Proceedings" for more information.
Matters Relating to Culver City System
The compound, methyl tertiary butyl ether (MTBE), an oxygenate used in
reformulated fuels, has been detected in the Charnock Basin, located in the city
of Santa Monica and within SCW's Culver City customer service area. MTBE is an
oxygenate used in reformulated fuels. At the request of the Regional Water
Quality Control Board, the City of Santa Monica and the California Environmental
Protection Agency, SCW removed two of its wells in the Culver City system from
service in October 1996 to help in efforts to avoid further spread of the MTBE
contamination plume. Neither of these wells has been found to be contaminated
with MTBE. SCW is purchasing water from the MWD at an increased cost to replace
the water supply formerly pumped from the two wells removed from service.
Pursuant to an agreement with SCW in December 1998, two of the
potentially responsible parties (the Participants) have reimbursed SCW's legal
and consulting costs related to this matter and for increased costs incurred by
SCW in purchasing replacement water. However, a notice of termination from the
Participants to the settlement agreement was received in October 1999 claiming
overpayments for replacement water in excess of SCW's water rights. No
assurances can be given that future negotiations will result in complete
restoration of SCW's water rights or that continued reimbursement of SCW's costs
will be forthcoming.
On September 22, 1999, the U.S. EPA and the Los Angeles Regional Water
Quality Control Board ordered Shell Oil Company, Shell Oil Products Company and
Equilon Enterprises LLC to provide replacement drinking water to both SCW and
the City of Santa Monica due to MTBE contamination of the Charnock Sub-Basin
drinking water. The EPA has ordered Shell Oil to reimburse SCW for water
replacement costs. The agencies are continuing to investigate the causes of MTBE
pollution and intend to ensure that all responsible parties contribute to its
clean up. Registrant is unable to predict the outcome of the EPA's enforcement
efforts.
Matters Relating to Yorba Linda System
The compound, MTBE, has been detected in three wells serving SCW's
Yorba Linda system. Two of the wells are standby wells and the third well has
not shown MTBE above the DOHS secondary standard of 5.0 ppb at this time. SCW
has constructed an interconnection with the Metropolitan Water District of
Southern California to provide for additional supply in the event the third well
experienced levels of detection in excess of the DOHS standard.
SCW has met with the Regional Water Quality Control Board, the Orange
County Water District, the City of Anaheim, the California Department of Health
Services and three potentially
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responsible parties (PRP's) to define the extent of the MTBE contamination plume
and assess the contribution from the PRP's. While there have not been
significant disruptions to the water supply in Yorba Linda at this point in
time, no assurances can be given that MTBE contamination will not increase in
the future.
Bear Valley Electric
SCW has been, in conjunction with the Southern California Edison unit
of Edison International, planning to upgrade transmission facilities to 115kv
(the 115kv Project) in order to meet increased energy and demand requirements.
The 115kv Project is subject to an environmental impact report (EIR) and delays
in approval of the EIR may impact service in SCW's Bear Valley Electric Service
customer service area. SCW has, however, taken other measures, that will be
enacted on an emergency basis, to meet load growth and mitigate delays in
approval of the EIR. In addition, third parties willing to construct gas-fired
generating facilities, sufficient to meet the peaking and future capacity needs
of Bear Valley Electric, in exchange for a long-term purchase contract have
approached SCW. Management is unable at this time to predict if such an
arrangement will be economically beneficial to customers or if the generating
facility can meet all environmental requirements.
YEAR 2000 ISSUE
Registrant has no Y2K incidents, business disruptions, failures or
legal proceedings to report. There were no actual or anticipated effects or
changes to Registrant's operating trends or revenue patterns as a result of the
transition from December 1999 to January 2000. SCW formally announced its 100%
Y2K Ready status when it filed its Compliance Report with the CPUC on November
1, 1999. Registrant has filed its final Compliance Report with the CPUC in March
2000.
Not all Y2K problems were necessarily expected to surface in early
2000. Registrant does not have, and may never fully have, sufficient information
about the Y2K exposure of third parties to adequately predict the risks posed by
them to Registrant. If the third parties later discover any Y2K problems that
are not remedied, resulting problems could include temporary loss of utility
services and disruption of water supplies.
Costs incurred to address Y2K issues are estimated to be approximately
$5.2 million. On March 1, 2000, Registrant filed an advice letter with the CPUC
for recovery of Y2K related costs. Registrant believes that generally these
expenditures will be recovered through rates, but can give no assurance that the
CPUC will authorize recovery of all or some of these costs.
RISK FACTOR SUMMARY
This section (written in plain English to comply with certain SEC
Standards) summarizes certain risks of our business that may affect our future
financial results. We also periodically file with the Securities and Exchange
Commission documents that include more information on these risks. It is
important for investors to read these documents.
Litigation
SCW has recently been sued in twelve water-quality related lawsuits:
- a suit filed on April 24, 1997 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been
designated a federal superfund site
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- a suit filed on July 29, 1997 alleging personal injury and property
damage as a result of the delivery contaminated of water; few of our
systems are located in the geographical area covered by this suit
- a suit filed on December 8, 1997 alleging personal injury and
property damage as a result of the delivery of contaminated water in
SCW's Arden-Cordova service area
- a suit filed on February 2, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed on February 4, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed in March 2, 1998 alleging personal injury and property
damage as a result of the delivery of contaminated water in SCW's
Arden-Cordova service area
- a suit filed on June 29, 1998 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
- two suits filed on July 30, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed on December 3, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed on July 22, 1999 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
- a suit filed on May 16, 2000 alleging personal injury and property
damage as a result of the delivery of contaminated water in SCW's
Arden-Cordova service area
On September 1, 1999, the First District Court of Appeal in San
Francisco, held that the CPUC had preemptive jurisdiction over regulated public
utilities and ordered dismissal of a series of lawsuits against water utilities,
including seven of the lawsuits against SCW. On October 11, one group of
plaintiffs appealed the decision to the California Supreme Court, which has
accepted the petition. Management cannot predict the outcome of the proceeding.
In March 1998, the CPUC issued an Order Instituting Investigation (the
OII) as a result of these types of suits being filed against water utilities in
California. The CPUC is seeking to determine:
- whether existing standards and policies regarding drinking water
quality adequately protect the public health
- whether water utilities are in compliance with existing standards
The Administrative Law Judge assigned to the OII has issued a draft
decision finding that water utilities, including SCW, have complied with DOHS
regulation and requirements. SCW is unable to predict whether the draft decision
will be approved in part or in its entirety.
The CPUC has authorized a memorandum account for legal expenses
incurred by water utilities, including SCW, in the water quality lawsuits. Under
the memorandum account procedure, SCW may
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recover litigation costs from ratepayers to the extent authorized by the CPUC.
The CPUC has not yet authorized SCW to recover any of its litigation costs. As
of June 30, 2000, Registrant had incurred $878,000 in the OII-related memorandum
account.
Environmental Regulation
SCW is subject to increasingly stringent environmental regulations that
will result in increasing capital and operating costs. These regulations
include:
- the 1996 amendments to the Safe Drinking Water Act that require
increased testing and treatment of water to reduce specified
contaminants to minimum containment levels
- interim regulations expected to be adopted before the end of 2000
requiring increased surface-water treatment to decrease the risk of
microbial contamination; these regulations will affect SCW's five
surface water treatment plants
- additional regulation of disinfection/disinfection byproducts
expected to be adopted before the end of 2002; these regulations
will potentially affect two of SCW's systems
- additional regulations expected to be adopted before the end of 2000
requiring disinfection of certain groundwater systems; these
regulations will potentially impact several of SCW's systems using
groundwater supplies
- potential regulation of radon and arsenic
- new California requirements to fluoridate public water systems
serving over 10,000 customers
SCW may be able to recover costs incurred to comply with these
regulations through the ratemaking process for our regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may recover costs
from parties responsible or potentially responsible for contamination.
Rates and Regulation
SCW is subject to regulation by the CPUC. AWR and ASUS are not directly
subject to CPUC regulation. The CPUC may, however, regulate transactions between
SCW and AWR, including the manner in which overhead costs are allocated between
SCW and AWR and the pricing of services rendered by SCW to AWR.
SCW's revenues depend substantially on the rates that it is permitted
to charge its customers. SCW may increase rates in three ways:
- by filing for a general rate increase
- by filing for recovery of certain expenses
- by filing an "advice letter" for certain plant additions, thereby
increasing rate base
In addition, SCW recovers certain supply costs through a balancing
account mechanism. Supply costs include the cost of purchased water and power
and groundwater production assessments. The balancing account mechanism is
intended to insulate SCW's earnings from changes in supply costs that are beyond
SCW's control. The balancing account is not, however, designed to insulate SCW's
earnings against changes in supply mix. As a result, SCW may not recover
increased costs due to increased use of purchased water through the balancing
account mechanism. In addition, balancing account adjustments, if authorized by
the CPUC, may result in either increases or decreases in revenues attributable
to supply
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costs incurred in prior periods, depending upon whether there has been an
undercollection or overcollection of supply costs.
There are also a number of matters pending before the CPUC that may
affect our future financial results. These matters include:
- the OII
- applications filed by SCW to increase rates and consolidate all of
its Region I rate-making jurisdictions
- an advice letter filed to seek recovery of capital expenditures
associated with Y2K readiness
- new guidelines under consideration by the CPUC for the acquisition
and merger of water utilities and for privatization transactions
- new guidelines issued by the CPUC for the use of regulated assets
for non-regulated activities
Adequacy of Water Supplies
The adequacy of water supplies varies from year to year depending upon
a variety of factors, including
- rainfall
- the amount of water stored in reservoirs
- the amount used by our customers and others
- water quality, and
- legal limitations on use.
Most of California's reservoirs remain at or near capacity and the
outlook for water supply in the near term is generally favorable. Population
growth and increases in the amount of water used have, however, increased
limitations on use to prevent overdrafting of groundwater basins. The import of
water from the Colorado River, one of our important sources of supply, is
expected to decrease in future years due to the requirements of the Central
Arizona Project. We also have in recent years taken wells out of service due to
water quality problems.
Water shortages could be caused by the above factors and may affect us
in several ways:
- they adversely affect supply mix by causing Registrant to rely on
more expensive purchased water
- they adversely affect operating costs
- they may result in an increase in capital expenditures for building
pipelines to connect to alternative sources of supplies and
reservoirs and other facilities to conserve or reclaim water
We may be able to recover increased operating and construction costs
for our regulated systems through the ratemaking process. Registrant may also be
able to recover certain of these costs under the terms of our contractual
agreements with municipalities.
In certain circumstances, we may recover these costs from third parties
that may be responsible, or potentially responsible, for groundwater
contamination. As of June 30, 2000, Aerojet General Corp.
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has previously reimbursed Registrant approximately $4.5 million for costs
associated with the cleanup of the groundwater supply for our Arden-Cordova
System and for the increased costs of purchasing water and developing new
sources of groundwater supply. On October 25, 1999, we sued the California
Regional Water Quality Control Board (CRWQCB) alleging that it has willfully
allowed portions of the Sacramento County Groundwater Basin to be injected with
chemical pollution that is contaminating the underground water supply in our
Rancho Cordova customer service area. In a separate lawsuit, also filed on
October 25, 1999, we sued Aerojet General Corp. for causing the contamination.
On March 22, 2000 Aerojet General Corp. filed a cross complaint against us for
negligence and constituting a public nuisance. We cannot predict the outcome of
these lawsuits but we will defend ourselves against these allegations. Two
potentially responsible parties on matter relating to the clean-up and purchase
of replacement water in the Charnock Basin located in the cities of Santa Monica
and Culver City have previously reimbursed us for replacement water and certain
legal and consulting expenses. The Charnock Basin is in our Culver City customer
service area.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk. The disclosure required is, therefore, not
applicable.
PART II
ITEM 1. LEGAL PROCEEDINGS
SCW is a defendant in twelve lawsuits involving claims pertaining to
water quality. Nine of the lawsuits involve customer service areas located in
Los Angeles County in the southern portion of the State of California; three of
the lawsuits involve a customer service area located in Sacramento County in
northern California. See the section entitled "Risk Factor Summary" for more
information.
On September 1, 1999, the First District Court of Appeal in San
Francisco, in a published opinion entitled Hartwell Corporation v. The Superior
Court of Ventura County (Hartwell), held that the CPUC had preemptive
jurisdiction over regulated public utilities and ordered dismissal of a series
of lawsuits pertaining to water quality filed against water utilities, including
SCW. Seven lawsuits against SCW have been ordered for dismissal by the state
Court of Appeals -- the Adler (Case No. 1), Santamaria (Case No. 2), Anderson
(Case No. 3), Dominguez (Case No. 4), Celi (Case No. 5), Boswell (Case No. 6),
and Demciuc (Case No. 7) Matters. On October 11, 1999, one group of plaintiffs
has appealed to the California Supreme Court, which has accepted the case.
Management is unable to predict the outcome of this proceeding but, in any
event, does not anticipate a decision prior to the fourth quarter of 2001.
On December 3, 1998, SCW was named as a defendant in a complaint in
multiple counts, styled Abarca, et al. v. City of Pomona, et al. (Case No. 8),
filed in Los Angeles Superior Court which seeks recovery for negligence,
wrongful death, strict liability, permanent trespass, continuing trespass,
continuing nuisance, permanent nuisance, negligence per se, absolute liability
for ultrahazardous activity, fraudulent concealment, conspiracy/fraudulent
concealment, battery and unfair business practices on behalf of 383 plaintiffs
(the Abarca Matter). Plaintiffs seek damages, including general and special
damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. SCW was served on
June 18, 1999.
SCW was named as a defendant, along with the City of Pomona, California
and Xerox Corporation in the matter styled Adejare, et al. v. Southern
California Water Company, et al. (Case No.
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9), filed on July 22, 1999 in Los Angeles Superior Court which seeks recovery
for wrongful death, battery and fraudulent concealment (the Adejare Matter).
Plaintiffs seek damages, including general and special damages according to
proof, punitive and exemplary damages, as well as attorney's fees, costs of suit
and other unspecified relief.
In December 1997 SCW was named a defendant in the matter of Nathaniel
Allen, Jr., et al. v. Aerojet-General Corporation, et al. (Case No. 10), which
was filed in Sacramento Superior Court. The complaint makes claims based on
wrongful death, personal injury, property damage as a result of nuisance and
trespass, medical monitoring, and diminution of property values (the Allen
Matter). Plaintiffs allege that SCW and other defendants have delivered water to
plaintiffs which allegedly is, or has been in the past, contaminated with a
number of chemicals, including TCE, PCE, carbon tetrachloride, perchlorate,
Freon-113, hexavalent chromium and other, unnamed, chemicals. SCW filed
Demurrers and Motion to Strike in this matter on June 5, 1998. A stay of all
proceeding in the Allen matter is in effect pending the outcome of the
California Supreme Court's proceeding in the Hartwell case.
In March 1998, SCW was named a defendant in the matter of Daphne Adams,
et al. v. Aerojet General, et al. (Case No. 11) that was filed in Sacramento
Superior Court (the Adams Matter). The complaint makes claims based on
negligence, strict liability, trespass, public nuisance, private nuisance,
negligence per se, absolute liability for ultrahazardous activity, fraudulent
concealment, violation of California Business and Professions Code section 17200
et seq., intentional infliction of emotional distress, intentional spoilage of
evidence, negligent destruction of evidence needed for prospective civil
litigation, wrongful death and medical monitoring. Plaintiffs seek damages,
including general, punitive and exemplary damages, as well as attorney's fees,
costs of suit, injunctive and restitutionary relief, disgorged profits and civil
penalties, medical monitoring according to proof and other unspecified relief.
SCW filed its Demurrers and Motion to Strike in this matter on June 5, 1998. A
stay of all proceeding in the Adams Matter is in effect pending the outcome of
the California Supreme Court's proceeding in the Hartwell case.
In June 2000, SCW was named a defendant in the matter of Wallace Andrew
Pennington, et al. v. Aerojet General, et al. (Case No. 12) that was filed in
Sacramento Superior Court (the Pennington Matter). The complaint makes claims
based on negligence, intentional infliction of emotional distress, strict
liability, public liability for ultra hazardous activity and fraudulent
concealment. Plaintiffs allege that SCW and other defendants knowingly operated
and maintained wells, which provided contaminated drinking water to the
surrounding communities. Plaintiffs seek damages, including general, punitive
and exemplary damages, as well as attorney's fees, costs of suit, special
damages, according to proof of medical bills and lost wages and lost income as
occasioned by personal injury and plaintiff's inability to pursue employment,
and other unspecified relief. All councils in the Pennington matter have agreed
to a stay in this matter, pending the outcome of the Hartwell case.
In light of the breadth of plaintiffs' claims in these matters, the
lack of factual information regarding plaintiffs' claims and injuries, if any,
and the fact that no discovery has yet been completed, SCW is unable at this
time to determine what, if any, potential liability it may have with respect to
these claims. Registrant believes there are no merits to these claims and
intends to vigorously defend against them.
ORDER INSTITUTING INVESTIGATION
In March 1998, the CPUC issued an OII to regulated water utilities in
the state of California, including SCW. The purpose of the OII is to determine
whether existing standards and policies regarding drinking water quality
adequately protect the public health and whether those standards and policies
are being uniformly complied with by those water utilities. The OII delineates
the constitutional
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and statutory jurisdiction of the CPUC and the California Department of Health
Services (DOHS) in establishing and enforcing adherence to water quality
standards. The CPUC's jurisdiction provides for the establishment of rates,
which permit water utilities to furnish water service meeting the established
water quality standards at prices, which are both affordable and allow the
utility to earn a reasonable return on its investment. SCW has provided its
response to a series of questions dealing with the adequacy of current drinking
water standards, compliance by water utilities with such standards, appropriate
remedies for failure to comply with safe drinking water standards and whether
increased enforcement and additional drinking water standards are necessary.
On June 10, 1999, the CPUC issued an interim order, which established
that the CPUC has jurisdiction to conduct the investigation regarding matters
related to water quality over those water utilities subject to its authority.
The Administrative Law Judge assigned to the OII has issued a draft decision
finding that water utilities, including SCW, have complied with DOHS regulation
and requirements. On July 7, 2000, the ALJ's draft decision was bifurcated into
two separate draft decisions -a Second Interim Opinion Resolving Substantive
Water Quality Issues and a Final Opinion Resolving Motions to Compel Discovery
and Motions to Withdraw from Proceeding. SCW is unable to predict whether the
draft decisions will be approved in part or in their entirety by the CPUC. SCW
anticipates a final decision by the third quarter of 2000.
OTHER LITIGATION
On October 25, 1999, SCW filed a lawsuit against the California
Regional Water Quality Control Board (CRWQCB) alleging that the CRWQCB has
willfully allowed portions of the Sacramento County Groundwater Basin to be
injected with chemical pollution that is destroying the underground water supply
in SCW's Rancho Cordova customer service area. Management cannot predict the
likely of this proceeding.
In a separate case, also filed on October 25, 1999, SCW sued Aerojet
General Corp. for causing the contamination. On March 22, 2000 Aerojet General
Corp. filed a cross complaint against SCW for negligence and constituting a
public nuisance. Registrant is unable to determine at this time what, if any,
potential liability it may have with respect to the cross complaint, but intends
to vigorously defend itself against these allegations. Management cannot predict
the likely outcome of this proceeding.
Registrant is also subject to ordinary routine litigation incidental to
its business. Other than as disclosed above, no legal proceedings are pending,
except such incidental litigation, to which Registrant is a party or of which
any of its properties is the subject, which are believed to be material.
ITEM 2. CHANGES IN SECURITIES
As of June 30, 2000, earned surplus amounted to $62,552,000, none of
which was restricted as to payment of cash dividends on Registrant's Common
Shares by any terms of Registrant's debt instruments.
As of June 30, 2000, authorized but unissued Common Shares include
500,000, 71,408 and 250,000 Common Shares reserved for issuance under
Registrant's Dividend Reinvestment and Common Share Purchase Program, Investment
Incentive Program (401-k) and 2000 Stock Incentive Plan, respectively. Common
Shares reserved for the 401-k Plan are in relation to the matching contributions
by SCW and for investment purposes by participants. Under the 2000 Stock
Incentive Plan, stock options representing 41,990 common shares upon exercise
were granted to certain eligible employees on May 1, 2000.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the second quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 10.18 American States Water Company 2000 Stock Incentive Plan
incorporated herein by reference to American States Water
Company Form S-8 filing on June 16, 2000. Commission File No.
333- 39428.
Exhibit 27. Schedule UT. (Submitted in electronic format only to the
Securities and Exchange Commission.)
No Reports of Form 8-K were filed during the period covered by this report.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and chief financial officer.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
By : /s/ McClellan Harris III .
---------------------------------------
McClellan Harris III
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
By : /s/ Linda J. Matlick .
--------------------------------------
Linda J. Matlick
Controller
Southern California Water Company
Dated: July 24, 2000
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